Government rules out flat-rate pension tax relief

The Government has refused to move to a single rate of pension tax relief due to the lack of consensus that a more radical reform is needed.

In its 18 page-long response to the Treasury select committee report Household finances: income, saving and debt, government officials also dismissed calls to scrap the Lifetime Isa.

In July, MPs argued pensions tax relief, the main financial incentive the government provides for long-term saving, was not an effective or well-targeted way of incentivising saving into pensions.

They said it should be fundamentally reformed and the government should consider replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief and promoting understanding of tax relief as a bonus or additional contribution.

In its response, the government argued it consulted on whether there was a case for reforming pension tax relief to strengthen incentives to save and offer greater simplicity and transparency, or whether it would be best to retain the current system, back in 2015.

“While the government keeps all taxes under review, no consensus for either incremental or more radical reform of pensions tax relief has emerged since the consultation in 2015,” the officials said.

No considerations were made to the Treasury select committee's suggestion of scrapping the lifetime allowance.

Another demand from MPs was the abolition of the Lifetime Isa (Lisa), saying it was too complex and not popular among savers.

The committee argued, at the time, that the product needed to be scrapped due to its perverse incentives and its inconsistency with the other parts of the long-term savings landscape, which, it said, had contributed to its limited take-up by customers and providers.

The Lisa was introduced in April last year and is aimed at a younger generation of savers who want to save for retirement or buy a first home.

It allows those aged between 18 and 39 to save up to £4,000 each tax year into the vehicle and receive a government bonus of 25 per cent of the contribution.

In its response, the government acknowledged the committee's view, but noted "no evidence was taken from any providers of the Lifetime Isa".

The officials noted that currently 19 providers offer the product and there are more than 190,000 open accounts, on which more than £170m has been paid out to date in bonuses.

"These numbers - which are likely to increase - demonstrate that people welcome the flexibility of the Lifetime Isa to save," the government said.

Conservative MP Nicky Morgan, chairwoman of the Treasury select committee, argued it is disappointing that the government "ignored the committee's call for the Lifetime Isa to be abolished, and will press on without reform".

She said: "Tax relief on pensions is not an effective or well-targeted way of incentivising saving, and the committee encouraged the government to consider replacing the lifetime allowance with a lower annual allowance.

"Following reports that the chancellor is considering a range of options for reforming pension tax relief in the Budget, the committee will keep a close watch on any announcements."